AJIT K.SENGUPTA, J. - (1.) IN this reference under s. 256(1) of the IT Act, 1961, the following question of law has been referred to this Court for the asst. yr. 1972-73: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 5,90,279 representing the actuarial valuation of the gratuity payable in future to the employees under the terms of the Company's Gratuity Scheme was an allowable deduction in computing the profits and gains of the assessee's business ?"
(2.) THE facts leading up to this reference are stated hereafter. In the course of the assessment proceedings, the assessee claimed before the ITO deduction of Rs. 5,90,279 for meeting the liability to pay gratuity to the employees in accordance with the Company's Gratuity Scheme. This claim was made on the basis of the actuarial valuation of the liability as on the last day of the previous year. The payment of gratuity to the employees was in accordance with the terms of the said scheme. The ITO disallowed the deduction in respect of the claim on the ground that the liability as at the end of the relevant accounting year was purely a contingent liability and not an accrued liability, and that the deduction claimed was not in respect of any contribution to any approved gratuity fund, which alone was admissible as deduction under the provisions of the Act. Aggrieved by this order, the assessee filed an appeal to the AAC who, relying upon the unreported judgment of the Calcutta High Court in Budge Budge Amalgamated Mills, allowed the claim of the assessee and directed the ITO to allow the said deduction of Rs. 5,90,279. The Revenue being aggrieved filed an appeal before the Tribunal. The Tribunal came to the conclusion that the liability accrued during the previous year and it was, therefore, deductible in computing the income of the assessee. The Tribunal, therefore, dismissed the Departmental appeal. Mr. Bagchi, on behalf of the Revenue, has contended that the payment of gratuity in this case was under a Scheme and not under the West Bengal Employees' Payment of Compulsory Gratuity Act, 1971. He has drawn our attention to the respondents reply in support of his contention that it is the case of the assessee that no provision had been made in the account for the amount of the claim of Rs. 5,90,279 and the claim for deduction was made for the liability ascertained on the basis of actuarial valuation in accordance with the terms of the said Scheme and not in accordance with the provisions of the said Gratuity Act. He, therefore, submits that it is not a statutory liability and, therefore, the assessee is not entitled to get deduction of the amount claimed. He also relied on r. 103 and r. 104 of the IT Rules, 1962, in support of his contention, that unless the CIT approves the gratuity fund and the assessee contributes to the said gratuity fund on a reasonable basis as may be approved by the CIT, the contribution will not be allowed as deduction under the IT Act, 1961. It is contended that the assessee providing a scheme for payment of gratuity cannot obtain greater benefit than what it might have obtained, had the gratuity fund been approved by the CIT. He also submitted that the decision of this Court in the case of CIT vs. Eastern Spinning Mills Ltd. (1980) 126 ITR 686, is distinguishable inasmuch as, in that case, the Court allowed deduction for gratuity being a statutory liability whereas in the instant case, such liability is not a statutory liability at all.
(3.) WE are unable to accept the contention of Mr. Bagchi for more than one reason. Firstly, no contention was raised before the Tribunal that because there was no statutory liability, the claim for gratuity could not be allowed. The contention was that the liability at the end of the relevant accounting year was a contingent liability and not an accrued liability and the deduction claimed was not in respect of any contribution to any approved gratuity fund which alone was admissible as a deduction under the provisions of the Act. Secondly, there cannot be a distinction in principle between a liability flowing from a contract and a liability created under the statute. The provision of the West Bengal Employees' Payment of Compulsory Gratuity Act, 1971, came into force in the relevant previous year. A liability was created by the statute for payment of gratuity by the employer. It did not preclude the employer to frame its own scheme for payment of gratuity to its employees so long as such scheme is not inconsistent with or repugnant to the provision of the said Act. The assessee had the liability to pay gratuity to the employees either under the Scheme or under the said Gratuity Act. In a case where the liability itself is contingent, there is no accrual of liability but in a case where the actuarial valuation is made in respect of a large number of employees retiring in different years, such actuarial valuation of the liability must be treated as an accrued liability of the year in question. In the case of Eastern Spinning Mills Ltd. (supra), this Court has laid down that the provision for gratuity made on actuarial basis was an allowable deduction under s. 37(1) of the Act, even though no sum was paid to an approved gratuity fund as required under s. 36(1)(v) of the Act. Apart from the fact that in the relevant year liability was created under the Gratuity Act, such liability for gratuity was also deductible because there was a scheme for payment of gratuity and there was an expectation of the employees of getting gratuity from the employer. Further, when gratuity is paid on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business, the payment of gratuity would be an allowable deduction. Whatever might have been the provision prior to 1971, as soon as the said Gratuity Act came into force, a special liability was created for the employer to pay gratuity. It is now well-settled that when the liability for payment of gratuity is ascertained by actuarial calculation in which all contingencies are taken into consideration, such liability is in praesenti and the amount so set apart is a permissible business expenditure in the year concerned for the assessee following the mercantile system of accounting.;